WRAPUP-Fed officials see high hurdle for changing course on QE taper

March 06, 2014|Reuters

By Jonathan Spicer, Luciana Lopez and Marc Jones

WASHINGTON/NEW YORK/LONDON, March 6 (Reuters) - The U.S.economic outlook would have to change dramatically for theFederal Reserve to alter the pace at which it is winding downits massive bond-buying program, three top U.S. central bankerssaid on Thursday.

And one, Atlanta Fed President Dennis Lockhart, told Reutersin an interview that even a third month of below-par U.S. jobsgrowth would not be enough to warrant such a move.

While Fed Chair Janet Yellen has stressed that her plannedwind-down of the stimulus program is not on a preset course, thecomments Thursday from Fed officials spanning the policyspectrum make it clear that the hurdle for any change is high.

Weak economic data, even if it persists for a few moremonths, does not meet that test, all three said.

"In my mind, unless we really fall off track in the economypretty dramatically, I think the tapering program shouldproceed," Lockhart told Reuters.

He added that the recent softness in economic data waslikely due to unusually severe winter weather and cautioned thatit could be April or May before the Fed has a clear read on theunderlying strength of the economy in the first quarter.

"There could be conditions in which a pause or even arenewal of purchases would be necessary, but I think the bar isvery high," said Lockhart, considered a policy centrist at theFed.

New York Fed President William Dudley, who leans toward thedovish end of the policy spectrum, agreed.

The threshold for changing course on stimulus withdrawal is"pretty high," he said during an event hosted by The Wall StreetJournal. "The outlook would have to change in a material wayrelative to my expectation."

At an event in London the hawkish head of the PhiladelphiaFed, Charles Plosser, said: "We are on this path now and we arenot going to deviate from that path unless something prettysignificant happens."

The Fed this year started winding down five years' worth ofunprecedented accommodative policies meant to fight the 2007-09recession and foster a stronger recovery.

That means the central bank will eventually stop buyingtrillions of dollars worth of bonds and holding overnightinterest rates at zero.

Dudley acknowledged that recent fierce winter weather inparts of the nation had depressed activity in early 2014, butsaid those effects will be both hard to gauge and transitory.

"The weather is going to make reading the data over the nearterm a little more difficult," he said.

Plosser, who like Dudley votes this year on the Fed'spolicy-setting panel, predicted it would take two more monthsbefore the Fed can get a clear reading on economic data.

That suggests that even if Friday's closely watched jobsreport falls short of expectations, Yellen would likely pressahead with reductions to the Fed's bond-buying program, known asquantitative easing, or QE.

The Labor Department is expected to report on Friday thatU.S. businesses added 149,000 jobs in February and theunemployment rate remained unchanged at 6.6 percent, accordingto a Reuters survey of economists.

HAWK-DOVE DIVIDE

Where the policymakers differed was in their views on howsoon the Fed may need to raise rates.

Plosser cautioned that the Fed should leave the door open tospeeding up the taper, or risk being behind the curve as theeconomy gains traction.

"If the economy continues to improve, we could findourselves still trying to increase accommodation in anenvironment in which history suggests that policy should perhapsbe moving in the opposite direction," he said.

Dudley, whose forecast of 3 percent growth for the U.S.economy this year matches Plosser's, suggested otherwise, sayingthat headwinds are likely to persist for some time.

"We have a long time to go before we actually have to thinkabout raising short-term rates in my opinion," said Dudley,whose views are extremely influential at the Fed policy-settingtable.

Traders of short-term U.S. interest rate futures put thefirst rate hike at some time in late 2015, based on trading atCME Group Inc's Chicago Board of Trade.

Both Lockhart and Dudley said those expectations arereasonable, given what is known about the economy today.

Last year, the Fed said it would not consider raising ratesuntil the jobless rate fell to at least 6.5 percent, just atenth of a percentage point from where it is now.

But policymakers have downplayed that threshold in recentmonths. Economists fear the falling unemployment rate partlyreflects large numbers of workers leaving the labor force.

Lockhart, Dudley and Plosser all said the 6.5 percentthreshold is providing little value and needs to be revisited.